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27 May, 06:17

Assume that the market for Good X is defined as follows: QD = 64 - 16P and QS = 16P - 8. If the government imposes a price floor in this market at $3.00, what will be the total loss in welfare to the economy?

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  1. 27 May, 07:50
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    The total loss in welfare to the economy will be - $32.

    Explanation:

    By intersecting the supply function QS to the demand function QD, we will find the equilibrium price:

    QD = QS

    16P - 8 = 64 - 16P

    16P + 16P = 64 + 8 =

    32P = 72

    P = $2.00

    Replacing the equilibrium price either in QS or QD, we foind the equilibrium quantity:

    QS = 64 - 16*2 = 64 - 32

    QS = 32

    In this case the total revenues at the equilibrium price RE will be:

    RE = 32 * $2 = $64

    On the other hand if the government imposes a price floor at $3.00, then the new total revenues RN will be:

    RN = 32 * $3 = $96

    Therefore the total losses is find by subtracting the revenue at the goverment price floor RN to the revenue at the equilibrium price RE:

    LT = RE - RN

    LT = $64 - $96 = - $32
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